Working Paper No. 497

The Unloved World Dollar Standard: Greenspan-Bernanke Bubbles in the Global Economy

by

Ronald McKinnon

April 2014

Stanford University John A. and Cynthia Fry Gunn Building

366 Galvez Street | Stanford, CA | 94305-6015

1

The Unloved World Dollar Standard:

Greenspan-Bernanke Bubbles in the Global Economy1

Ronald McKinnon2

April 2014

I’m forever blowing bubbles,

Pretty bubbles in the air,

They fly so high, nearly reach the sky,

Then like my dreams they fade and die.

Old Cockney Folk Song

Abstract

The U.S. Federal Reserve’s monetary policy at the center of the world dollar standard has

a first-order impact on global financial stability. However, except in moments of international

crises, the Fed focuses inward on domestic American economic indicators and generally ignores

collateral damage from its monetary policies in the rest of the world. But this makes the U.S.

economy less stable. Currently, ultra-low interest rates on dollar assets ignite waves of hot

money into Emerging Markets by carry traders that generate bubbles in international primary

commodity prices and other assets. These bubbles burst when some accident at the center, such

as a banking crisis, causes a reflux of the hot money. Ironically, these near-zero interest rates

hold back investment in the American economy itself.

Key Words: Dollar standard, Exchange rates, Hot money flows, Emerging markets, Commodity

price cycles

JEL Classification No.: F30, F40, F50.

1 Economics Department, Stanford University, Stanford, California 94305-6072, U.S.A,

mckinnon@stanford.edu 2 This paper is written in an informal style without all the usual detailed academic attributions. My excuse

that it is really a synopsis of the main theme of my recent book, The Unloved Dollar Standard: From

Bretton Woods to the Rise of China, (Oxford University Press, 2013; Chinese translation, China Financial

Publishing House, 2013). For a more extensive analysis with references, please consult the book itself.

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Introduction

For better or for worse, the world economy is on a dollar standard—and has been since

the end of World War II [McKinnon 2013, chs. 1& 2]. From 1945 up to the late 1960s, this

accident of history was for the better. The United States’ monetary policy remained stable, and

its current account showed a moderate surplus— which was offset (financed) by outward private

direct investment combined with official capital outflows. Most notable was the remarkably

successful Marshall Plan, which, through stable dollar exchange rates within the European

Payments Union of 1950, helped promote European economic integration and recovery from

World War II. Less well recognized was the Dodge Line of dollar credit to Japan that, in 1949,

anchored its war-torn financial system at 360 yen per dollar and undergirded extremely rapid

noninflationary economic growth into the 1970s [McKinnon 2013, ch 3].

But beginning in August 1971, when the “Nixon Shock” of forced dollar devaluation,

erratic U.S. monetary policies have caused major upheavals both in the center country itself and

in its ever-changing periphery. Instead of behaving appropriately as the world’s de facto central

bank, the U.S. Federal Reserve became a serial bubble blower by inducing flows of volatile “hot

money” into economically important peripheral countries—mainly Western Europe and Japan in

the 1970s and 1980s, but also in emerging markets (EM) in the new millennium.

When markets anticipate dollar devaluation, or when the Fed keeps its domestic interest

rates too low relative to natural rates of interest prevailing elsewhere, hot money flows out of the

U.S. Then no matter what its exchange rate regime, a peripheral central bank faces a dilemma:

either allow its exchange rate to appreciate against the dollar and thus lose export

competitiveness against its neighbors, or intervene to buy dollars with domestic base money and

lose monetary control. A collective loss of monetary control in peripheral countries has led to

international price inflation, often first manifested in a bubble in the dollar prices of primary

commodities, before being embedded more deeply in their industrial systems. The U.S. itself is

last in line with longer lags to receive the inflationary impulse—if ever— before the bubbles

burst.

This dollar-led, hot-money syndrome explains much of the great world inflations of the

1970s [McKinnon 2013, ch 4] As early as 1970, markets began to anticipate what became

known as the Nixon Shock of forced dollar devaluation in August 1971. In 1970—71, hot

money flowed out of the U.S into the other industrial countries with convertible currencies. This

forced central banks in Western Europe, Canada, and Japan to intervene massively, and sharply

increase their holdings of official dollar exchange reserves—with concomitant large increases in

their domestic monetary bases. Mainly outside of the United States itself, the “world” money

supply exploded with inflation in commodity prices—particularly oil—shooting up in 1973—74.

After inflation was somewhat tamed in 1975 by a worldwide recession, in 1976 a similar

sequence of events was unleashed by the incoming Carter government trying to talk down the

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dollar—particularly against the yen—in the mistaken belief that this would reduce the U.S. trade

deficit. Again hot money flowed out of the U.S. in 1977 into 1978 with a weakening

(depreciating) dollar. In a crisis atmosphere, a consortium of foreign central banks intervened in

October 1978 to buy dollars and put a floor under its foreign exchange value; and the Fed was

forced to raise interest rates. But the damage had been done. With the sharp buildup of dollar

foreign exchange reserves, the world money supply outside the United States again ratcheted

upward, leading to a surge in commodity prices and generally high inflation in the industrial

world from 1979 to 1980.

Greenspan-Bernanke Bubbles: 2002—13

With this background in mind, let us fast forward to 2002 and the Greenspan-Bernanke

era of U.S. hot money outflows generating “bubbles” in the world economy [McKinnon 2013,

chs 4 and 5]. Over-reacting to the collapse of the dotcom bubble in the U.S. stock market in

2001, Fed Chairman Alan Greenspan cut the interbank overnight lending rate to just 1 percent in

2002 (followed by LIBOR shown In figure 1) and kept it there into 2004. Again hot money

flowed out of the United States, but this time the relevant periphery of the dollar standard was

mainly emerging markets (EM) with convertible- currency countries with naturally higher

interest rates reflecting their higher growth.

Figure 1

Each EM central bank was then faced with the now-familiar dilemma: either let its

currency appreciate rapidly or intervene to buy dollars and lose monetary control. In practice,

they did some of both. Figure 2 shows the remarkable buildup of foreign exchange reserves in

EM of almost $6 trillion after 2002, with China accounting for about half the total. Then, not

including China, figure 2A shows the widespread geographical buildup of official reserves in

EM throughout Latin America, Europe, the Middle East, and developing Asia. The lower panel

of Figure 2A (right hand side) then shows the rise in an index of EM exchange rates when hot

money flows in (2006—07 and 2010) and then sharp fall when it flows out (2008, and 2012-13).

Figure 2

Figure 2A

Figure 3 shows the relatively higher inflation in EM compared to the U.S. despite the net

appreciation of EM exchange rates against the dollar from 2002 to 2007 (figure 4). The

collective loss of monetary control in EM, and ultra-low U.S. interest rates, created bubbles in

asset markets. The best known was the huge bubble in US real estate prices—particularly home

prices—that peaked in early 2007. But, as we shall see, concurrent bubbles in commodity and

stock prices lasted into 2008 before bursting.

Figure 3

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Figure 4

Hot money outflows from the center are typically financed by banks that lend to “carry

traders”, i.e., speculators who borrow in low-interest-rate currencies (or so-called source

currencies) to invest in currencies with higher interest rates and/or in those expected to

appreciate (so called investment currencies). The outflow of hot money from source currencies

may well cause the source currency to depreciate for some time. Figure 5 shows the steady

depreciation of the dollar’s effective exchange from 2002 until early 2008. Insofar as carry

traders were chartists who simply extrapolated the dollar’s depreciation while ignoring the risks

involved, they saw a double incentive to move hot money out of the U.S. into those EM with

higher interest rates and appreciating currencies.

Figure 5.

However, these “hot” money outflows can be interrupted by banking crises. When

(international) banks are suddenly impaired: they cease lending for speculative purposes and

even demand repayment of previous short-term loans. These sudden withdrawals of dollar

credits can be particularly sharp because the dollar is viewed as the safe haven currency in time

of crisis—even when the banking crisis originated in U.S.

The banking crisis from defaulting subprime mortgages, mainly associated with the

bursting of the U.S. real estate bubble in 2007—08, led to a sharp reflux of hot money to the

United States. Figure 2A shows the drop in the rate of accumulation of EM central bank reserves

in 2008, and figure 4 shows the depreciation of EM exchange rates against the dollar. Figure 5

shows the sharp appreciation of the dollar’s effective exchange rate in 2008—very hard on carry

traders who do not (cannot) hedge their foreign exchange risks.

But this is not the end of the Fed’s bubble blowing. Under Chairman Ben Bernanke, the

Fed over-reacted again to the 2008 downturn by cutting the U.S. intra bank overnight lending

rate to virtually zero in December 2008—and then, as figure 1 shows, keeping it there so as to

depress LIBOR to the present writing (March 2014). By mid 2009, however, the U.S. sub-prime

mortgage crisis seemed to be contained. The U.S. Treasury’s Troubled Asset Relief Program

(TARP) massively recapitalized banks and other important American financial institutions. By

2013, TARP has been a success as the U.S. banks have paid back virtually all they had

borrowed.

But the huge interest gap between the U.S. and EM remains. Figure 6 shows the average

discount (bank lending) rates of the BRICS—an acronym for Brazil, Russia, India, China and

South Africa—about 6 percent compared to near zero in the U.S. (and in the Euro Area and

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Japan). Because the U.S. banking crisis had been ameliorated by mid-2009, bank lending to

carry traders was no longer as constrained. No wonder the carry trade out of dollars and other

source currencies into EM currencies started up again in 2009-11 with a depreciating effective

exchange rate for the dollar (figure 5), and creating a new bubble in primary commodity prices.

Figure 6

This second bubble began bursting in mid 2011, at the height of the international banking

crisis associated with the travails of the euro. A net withdrawal of bank loans prevented carry

traders from sending hot money into EM. Figure 5 shows the second sharp appreciation of the

dollar’s effective exchange rate in 2012 as money returned to the United States.

In these two great waves of hot money flows into emerging markets, the position of

China compared to other BRICS was rather special. From 2002 to 2013, the yuan/dollar rate

remained relatively stable with the RMB appreciating very slowly and smoothly (figure 4). This

reflected the massive interventions of the People’s Bank of China (PBC) to buy dollars and peg

the yuan dollar rate at the beginning of every trading day—while allowing at most a 1 percent

movement during the day, with an average annual appreciation of only about 3 percent.

In late February 2014, the PBC surprised the market by allowing the RMB to depreciate

against the dollar by 1.5 percent. Then, in mid-March 2014 to further deter carry traders by

introducing more exchange risk into the system, the PBC government announced a somewhat

wider band of ± 2 percent around the central rate prevailing at the beginning of each trading day.

Whether these policy changes signal the end of predictable appreciation in the medium term—a

one-way bet on which carry traders thrive—only time will tell. However, what does seem clear is

that the yuan/dollar will still remain much more stable than the exchange rates of other BRICS.

In contrast, the other BRICS had massive appreciations followed by depreciations as the

bubbles burst. In particular, the dollar price of Brazilian Real more than doubled from 2003 to

2007 (figure 4), and knocked the economy on its high growth trajectory. Contrary to

conventional economic theory, a floating exchange rate does not insulate any national economy

from monetary shocks in the form of a hot money inflow—and can further destabilize it.

The effects of both these bubbles and their eventual collapse is summarized in figure 7,

“The Greenspan-Bernanke Bubble Economy”; it records America’s experience with bubbles in

property values, stock prices, and the dollar prices of primary commodities, from 2002 to 2013.

Figure 7

The Arab Spring

The ebb and flow of hot money, and particularly its effects on the prices of primary

commodities, where many EM and other developing countries are major producers, is certainly

disconcerting for them. Primary products—particularly food grains and oils—are also key

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components in the consumption baskets of most of these countries, the per capita incomes of

which are much lower than in mature industrial economies. Indeed, the political survival of

governments in many poorer countries often depends on keeping domestic food and energy

prices down.

Starting in mid-2009, the second great hot-money bubble caused international prices of

food grains to virtually double in 2010 (Figure 8). In December 2010, a poor Tunisian food

vendor immolated himself, not being able to get food at controlled prices to satisfy his

customers. This spectacle set off a food riot in Tunisia which brought down its government.

Further, it set off contagious riots throughout North African and other poorer Arab countries that

were not major oil producers. Collectively, these riots to throw out incumbent governments

(usually corrupt ) became known as the “Arab Spring”.

Figure 8

But the Arab Spring was misnamed. The semantics initially connoted a longing for

democracy by long repressed populations to throw out corrupt, dictatorial governments and

replace them with something better. What actually happened is better interpreted as a collective

food riot—made all the more “contagious” by the countries involved all suffering sharp increases

in food prices in the same time year, 2010. If the Arab uprisings had been mainly recognized as

food riots, the response of the industrial countries could have been different. Instead of

supporting political revolutions to “throw the rascals out”, they should have focused more on

international monetary measures to dampen international cycles in primary commodity prices.

Quantitative Easing in Financially Mature Market Economies

Much of this paper concerns volatile hot money flows into emerging markets that cause

bubbles in international asset prices—particularly in primary commodities. The root cause of this

financial volatility was the ultra-low interest rates in mature industrial countries at the center of

the global financial system relative to the naturally higher interest rates in emerging markets on

the periphery.

But all industrial countries are not financially equal. Most of the world remains on what

I call The Unloved Dollar Standard (McKinnon 2013). Thus the U.S. Federal Reserve Bank took

the lead in pushing interest rates toward zero both at short term and, more recently, at long term

through what is now commonly called quantitative easing (QE). The Fed cut its overnight intra-

bank lending rate to just 1 percent in 2002, and then to virtually zero in December 2008 (figure

1). In implementing QE since 2008, the Fed has bought huge quantities long-term financial

instruments— mainly U.S. Treasury bonds. In 2013, the Fed was buying about $85 billion per

month. From 2008 through 2012, the Fed had some apparent success with QE in driving long

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rates down—the 10-year Treasury Bond reach 2 percent (figure 1). ( But not subsequently as we

shall see.)

Remarkably, central banks in the other mature industrial countries— the Bank of England

(BOE), the European Central Bank (ECB), and the Bank of Japan (BOJ) as well as the Fed—

also kept their short-term interest rates near zero, and since 2008 drastically expanded their

balance sheets through some form of QE. Figure 9 shows that the BOE, since 2007, actually

purchased more assets—measured as proportion of British GDP—relative to the massive asset

purchases of the other three central banks. But despite (or because of?) these massive asset

purchases, all four central banks more or less failed to stimulate their economies’ very sluggish

recovery from the 2008 downturn through to 2013.

Figure 9:

In contrast, central banks in emerging markets on the “periphery” follow monetary

policies more geared to stabilizing their dollar exchange rates because they were buffeted from

the ebb and flow of hot money from the center—as we have seen. Since they are less mature

financially and fiscally, they dare not risk major runs to develop for or against their domestic

monies by, say, following a policy of keeping short-term interest rates near zero. Although

pressed down by the weight of low interest rates in the center countries, they still have

maintained substantially positive nominal interest rates and have eschewed massive monetary

expansions in the form of quantitative easing.

In contrast, the mature industrial economies at the center can ignore the ebb and flow of

hot money to the periphery. They are all following very similar monetary policies with similar

short-term interest rates (near zero), and in further part because their greater financial maturity

lets importers and exporters hedge their exchange risks more easily. In effect, they have more

truly “floating” exchange rates than EM. Nevertheless, not withstanding floating exchange rates,

the industrial economies have created a monetary trap for themselves from which escape is

difficult.

The Near-Zero Interest Rate Trap in Industrial Economies through 2014

The conventional critique of the Federal Reserve's policies of near-zero interest rates

and massive monetary expansion is that they risk kindling excess aggregate demand and high

inflation. Yet inflation worldwide remains low, and some major trading partners of the United

States, such as Japan and now China, are worried about deflation. China's producer price index

fell 2.7 percent in June 2013, the 16th consecutive monthly decline.

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Instead, I shall argue that extremely low short- and long-term interest rates so distort the

financial system that they hold investment and the economy back. And modest increases in

interest rates to more "normal" levels could lead to more investment without an inflation risk.

For an example of how near-zero short-term interest rates can inhibit private investment,

consider a bank that accepts deposits and makes new loans of three-months' duration. The

traditional spread between deposit and loan rates is about 3 to 3.5 percentage points. With this

spread, banks can lend to small- and medium-size enterprises, the so-called SMEs—making

loans that carry moderate risks and higher administrative costs per dollar lent. To increase the

safety of its overall loan portfolio, the bank can also lend greater amounts to larger, more

established corporate enterprises.

However, as short-term interest rates are compressed toward zero, larger corporate

borrowers find it more advantageous to raise money by selling short-term commercial paper

directly to other corporations, pension funds, and money-market mutual funds for less than the

banks’ prime loan rate. This leaves smaller banks in particular with a riskier portfolio of loans

to SMEs, and the need to raise more bank capital to support riskier liabilities—so they may

instead shrink the size of their loan portfolios.

Also, smaller banks can't easily borrow funds from other banks to lend out to companies

when interest rates are near zero. These other banks aren't inclined to lend their excess

reserves for a tiny yield, especially in the presence of even moderate counterparty risk. They

will instead just hold excess reserves.

As interest rates fall, money-market mutual funds will buy highly rated commercial

paper and other short-dated financial instruments. However, if short-term interest rates

approach zero, these money funds fear "breaking the buck." Even a small negative random

shock to the mutual fund's portfolio from a client failing to repay could jeopardize the fund's

ability to cover interest payments to depositors. This means that depositors might only get 99

cents back on each dollar invested. Sponsors of these money-market mutual funds, often

banks, are paranoid about the reputational costs of breaking the buck—so they may either

close their money market mutual funds or limit new deposits.

Despite the difficulties in an ultra-low interest environment in getting short-term bank

financing, can't larger, well-known corporations still get the investment funds they need by

selling longer-term bonds? Indeed, in the surprisingly sluggish recovery of the of the mature

industrial economies from the sharp down turn of 2008, direct finance —the sale of bonds and

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stocks by large corporate enterprises—whose names are well recognized in the financial

markets—has boomed. While bank credit for small and medium sized enterprises (SMEs) has

languished. And in cyclical recoveries, rapid employment growth depends on SMEs.

Bu the boom in bond finance need not continue. The problem here is that as banks and

other financial institutions get used to near-zero interest rates and accumulate bonds with low

coupon rates for some years, they end up in a trap from which escape is difficult. And this trap

has negative implications even for corporations that seek direct long-term financing.

The trap was revealed for all to see after Fed Chairman Ben Bernanke suggested, in

congressional testimony on May 22, 2013, that the central bank might slow down, i.e., taper

off, its huge purchases of long-term Treasury bonds and other long-term securities—

purchases designed to keep long-term interest rates low.

Chairman Bernanke carefully hedged his statement. He said that certain preconditions of

the economic recovery, notably a sharp fall in the unemployment rate to 6.5 percent, had to be

met before tapering could begin. But markets ignored these caveats. Long-term interest rates

rose from 1.5 percent to 2.5 percent in the U.S., and stock markets crashed around the world in

the four days that followed.

A chastened—and trapped—Mr. Bernanke backtracked in a June 19, 2013 press

conference and said that money will remain easy for the foreseeable future. But the low-

interest trap matters for the efficiency of the long-term bond market. In March 2014, Janet

Yellen, the new Chairman of the Federal Reserve Bank, began modest tapering by cutting

back Fed Purchases of long–term bonds by $10 billion dollars from $85 billion. Again long-

term interest rates and bond prices gyrated—with a further return of hot money from

vulnerable emerging markets, such as India and Turkey, putting downward pressure on their

currencies in the foreign exchanges.

What have central banks wrought? As Andrew Haldane, a top official at the Bank of

England, declared on June 12, 2013 of his own institution. "Let's be clear. We've intentionally

blown the biggest government bond bubble in history. We need to be vigilant to the

consequences of that bubble deflating more quickly than [we] might otherwise have wanted" .

By trying to stimulate aggregate demand and reduce unemployment, central banks have

pushed interest rates down too much and inadvertently distorted the financial system in a way

that constrains both short-term, and potentially long-term, business investment. The misnamed

monetary stimuli are actually holding the economy back.

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The Federal Reserve, the Bank of England, the Bank of Japan and European Central

Bank all have used quantitative easing to force down their long-term interest rates. The result

is that major industrial economies have all dramatically increased the market value of

government and other long-term bonds held by their banks and other financial institutions.

Now each central bank fears long-term rates rising to normal levels because their nation's

commercial banks would suffer big capital losses—in short, they would "de-capitalize."

But the potential turmoil in bond values also makes it more difficult for corporations

seeking to raise long-term financing. In the face of greater interest rate volatility, bond-market

dealers in the U.S. are currently paring their inventories because of the associated risks

In 2009, when the Federal Reserve initiated quantitative easing, the prices of bonds and

equities rose as long-term interest rates fell so as to buoy the economy—a short-lived

honeymoon. Now in 2014, because of depressed market rates for some years so that coupon

rates on long-term bonds have become very low, any significant increase in market interest

rates would cause a larger slump in the capital values of these bonds. Even discussing the

potential for exiting from the Fed’s quantitative-easing program creates high volatility in bond

markets from expectation effects—a volatility that inhibits new bond offerings for domestic

investment. Mr. Bernanke's tapering speech illustrates how that can happen: new bond and

equity issues are put on hold.

The Bursting of the Government Bond Bubble in 2014?

The way out of this bond-bubble trap that central banks from the industrial countries set

for themselves, is not clear and likely to be very messy financially.

The most straight forward approach is for the leading central banks—the Federal Reserve,

the Bank of England, the Bank of Japan and the European Central Bank—to admit they were

wrong in driving interest rates too low in the pursuit of a nonmonetary objective such as the level

of unemployment. After all what Milton Friedman taught us in his famous 1967 AEA

presidential address, “The Role of Monetary Policy”, the central bank cannot (should not)

persistently target a nonmonetary objective—such as the rate of unemployment, which is

determined by too many other factors.

The four central banks could begin slowly increasing short-term interest rates in a

coordinated way to some common modest target level, such as 2 percent. Coordination is crucial

to minimize disruptions in exchange rates. Then our gang of four they should phase out

quantitative easing so that long-term interest rates once again become determined by markets.

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The whole process should be transparent so that “markets” know the endpoints of this new

policy.

If markets come to believe their governments will achieve close to a low, 2 percent, level

for short rates into the indefinite future, this then will cap long rates as quantitative easing ends.

Remember that market-determined long rates are just the mean of expected short rates plus a

liquidity premium.

Alternatively, the bubbles in government bond prices in one or more of the industrial

countries could burst of their own accord as central banks lose control. Long-term interest rates

would rise more sharply and erratically. Besides disrupting the industrial economies themselves,

more hot money would be pulled out of emerging markets forcing them to intervene to stabilize

their dollar exchange rates. They would then have to draw down their official exchange reserves

and thus sell some of their U.S. Treasury bonds. This would of course accentuate the upward

pressure on long term U.S. interest rates. If there was a flight of hot money out of EM

economies, their growth would slow further than that shown in Figure 10.

Figure 10

A flavor of this unfortunate scenario can seen by the upward, erratic movement in long-

term interest rates on U.S. Treasury bonds in 2013 into 2014 (figure 1) as Fed Chairs Ben

Bernanke and then Janet Yellen discuss possible tapering of quantitative easing in the United

States. But only time will tell.

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Figure 1: US Interest Rates

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

USD Libor

10 Year Treasury

Source: FRED

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Figure 2. Emerging Markets and China, Foreign Exchange Reserves (Billion USD)

0

1000

2000

3000

4000

5000

6000

7000

8000

Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Total Emerging Markets China

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Figure 2A Change of Reserves in Selected Emerging Countries

Source: Financial Times

15

Figure 3 Headline CPI: EM and US

-2

0

2

4

6

8

10Ja

n-0

2

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

GDP WeightedEM CPI

US Headline CPI

Source: EIU, Author's Calculation Emerging Markest include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand

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Figure 4 BRICS Currencies, LCU (local currency unit)/USD, Jan-2002=100

40

60

80

100

120

140

160

China

Brazil

Russia

India

South Africa

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Figure 5. US Real Effective Exchange Rate, Jan-2000=100

80

85

90

95

100

105

110

115

120

125

Dollar Carry Trade

Credit Crunch

New Dollar Carry Trade

Eurozone Crisis

Source: Federal Reserve

Emerging Market Slowdown

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Figure 6. GDP Weighted Discount Rate of BRICS and G3

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

BRICS G3Source: IMF, EIU

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Figure 7: The Greenspan-Bernanke Bubble Economy 2002 to 2013 (2005 =100)

80

100

120

140

160

180

200

220

240

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013Case-Shiller CRB Commodity Index S&P 500 Core CPI

Source: Bloomberg

20

Figure 8 Food/Agriculture Product Price Indexes (2005=100)

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010 2011 2012 2013

UN Food And Agriculture World Cereals Price Index S&P GSCI Agriculture IndexSource: Bloomberg

Start of Arab Spring Dec 2010

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Figure 9. Size of Central Bank Balance Sheet, % of GDP

0%

5%

10%

15%

20%

25%

30%

35%

40%

Japan UK US EuroAreaSource: Bloomberg, OECD Stat

22

Figure 10. GDP growth: Developed vs. Developing World

-6

-4

-2

0

2

4

6

8

10%

Advanced Economies Emerging and Developing CountriesSource: IMF